What is a “partnership”?
A partnership is relationship created by a contract entered into between or among two or more individuals, partnerships or corporations that carry on business together with a view to profit. The partnership agreement can be very detailed or very short, depending upon the purpose of the partnership. In the agreement, the rights and obligations of the partnership, the payment details, the auditing frequency and process, the dissolution rights of the partners and the disposition of assets on dissolution may be set out.
What are the various types of partnerships?
A partnership may be either a general partnership, a limited partnership or, in some Canadian jurisdictions, a limited liability partnership. In addition, some Canadian jurisdictions, such as Ontario, have special rules for extra-provincial partnerships.
(i) General Partnership. In a general partnership, all partners are entitled to participate in ownership and management of the partnership and have implied authority to bind the partnership within the ostensible scope of the partnership’s business. Each partner is jointly and severally personally liable for the debts and liabilities of the partnership.
(ii) Limited Partnership. In a limited partnership, there must be at least one general partner who manages the business and is subject to unlimited personal liability for the debts and liabilities of the partnership and there may be other limited partners who contribute capital (which is at risk) but who have no personal liability, unless they participate in the management of the business, in which case they also become personally liable for the debts of the partnership. Accordingly, participation by a limited partner in the management of the business may strip the partner of his or her limited liability. Also, remember: when drafting the limited partnership agreement, the limited partners should not reserve to themselves too much responsibility or they will lose their limited liability status. For this reason, a limited partnership is generally more suitable for passive investors.
(iii) Limited Liability Partnership. In a limited liability partnership, the partners are not personally liable for the negligent acts of another partner or an employee who is directly supervised by another partner. Partners are liable for their own negligence and for the negligence of someone under their direct supervision or control and are jointly and severally responsible for the general obligations of the partnership. Generally, limited liability partnerships are only permitted for the purpose of practicing a profession recognized by legislation in a province where the governing body of the profession requires the partnership to maintain not less than a minimum amount of liability insurance and the partnership registers its firm name with the appropriate provincial registrar.
Is a partnership structure appropriate for your business?
Using a partnership, particularly a limited partnership, as a business vehicle is desirable whenever you want a flow-through of tax treatment to the investors, particularly where the primary investment incentive is the utilization of tax losses and deductions generated by the partnership to offset income from other sources. Generally, income generated from the partnership is income of the partners and is taxed accordingly. For example, limited partnerships are often used in the resource development and real estate industries.
In addition, partnerships are useful in connection with businesses which do not need to retain large operating profits in the business for future expansion or for businesses in the formative stages before they become very profitable and produce large amounts of unsheltered income.
Limited liability partnerships are only available in certain provinces and then only for the purpose of practicing a recognized profession.
We recommend that prior to entering into any partnership agreement you obtain advice from a lawyer and an accountant qualified to provide you with good advice so that the structure accomplishes your business objectives, protects your investment and limits your liability to the extent possible and minimizes, and where possible defers, the amount of taxes you pay upon funds distributed from the partnership.
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Koby Smutylo – Business Law
236 Metcalfe Street, Ottawa, Ontario K2P 1R3 Canada
Telephone: 613 869 5440 • Facsimile: 613 691 0661 •koby@lawyercorporation.ca
www.lawyercorporation.ca
